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I had a blog entry for you, but it eated me

Subject says it all. Actually, I had about three blog entries planned; a Gadget Patrol item on the subject of the Kindle Fire, a bookish chewing-over of David Graeber's Debt: the first five thousand years, and a random semiotic grenade ... but it turns out that the Kindle Fire is a paperback-sized tablet that does what it says on the tin (essentially more of the same), I haven't finished the Graeber book yet, and I am come home from Satellite III to find the page proofs to the next Laundry novel awaiting my urgent attention. And I am completely exhausted. Haven't had time to write any fiction for a month, either.

So I am about to duck out for a while and (a) sleep then (b) work. And in the meantime, I leave you with this question: what is money?

203 Comments

1:

Money at its core is a means of exchange.

It means that while I farm pigs I don't need to trade directly with the man who makes shoes down the road. Rather I can sell the pigs to someone who wants those pigs for money and then use that money (or some of it) to buy a pair of shoes.

The core bit here is that money facilities exchange. I don't need to barter my pigs for a pair of shoes rather I can treat everything as separate transactions.

2:

What is money, apart from a scarce resource nowadays...

In all seriousness Debt: The First 5K is already on my kindle and reading list (after Guy Harrison's 50 popular beliefs). On the subject of money the boring answer is that it is a convenient way of swapping goods and services without having to barter every single time. The important things about money is that it lasts, it's hard to forge and it's fungible (trying to get change from half a bartered sheep can make consumers squeamish).

Definitely interested to hear the Strossian take on money (and so called "post-scarcity" if you ever have the inclination)

3:

Which is to say: money is an indirection layer for exchange.

4:

Things that most people will accept as reward for doing something they wouldn't normally do, that they can pass on in turn.

5:

I stick with Robert Anton Wilson's conception of money: A substitute measure of an individual's tribal belonging/status*, now that our tribes are too big for everyone to keep track of everyone else.

It's also a handy medium of exchange, at least with other folks who believe in the same money as you.

*Sorry for my crappy writing - I don't have terminology for, "how close an individual is to the core clique, vs. how far from banishment."

6:

Money, aside from being a mean of exchange, is a store of value. Can't keep pigs for 40 years, but the value of a pig, sure.

If, of course, the value of the pig doesn't fluctuate wildly, you might even have roughly enough money to buy a new pig 40 years after you sell it...

I think that's the interesting part of money, in that, rather than being instantanous in the sense that its a means of exchange, you can exchange labor or wealth for money, put it in a hole, and dig it out with some value later on, and have it be something that has a dimension over time, and in many cases, a longer lifespan than pigs, people, buildings, or nations.

Hole's a pretty bad bank in an inflationary economy, but an excellent one in a deflationary one, and you can play with the idea of value changes overtime to your heart's content.

7:

Money is, originally, a commonly accepted medium of exchange. Debt isn't a bad analysis, but it feels one sided. (One side is debt, the other is investment.)

OTOH, official currency is something the government promises to accept as tax payments, so it doesn't take your property, or possibly your life. This is only a subset of money, but it's the most common form that one encounters this century.

8:

ok, sticks toe in pool.. i'll bite..

A representation of a currency unit - an arbitrary agreement of value in a given context, perception being the guiding principal to the context, ie. it's value to the parties involved in the transaction.

9:

Hey, where did the link to Vim for iPad disappear? I saw it in my feed reader...

10:

The debt book contains the following line which readers of this blog might be amused by:

"Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other’s garages."

I can only hope the ancient sumerian data is half as well researched.

11:

Oooh, fun! Purposefully posting comment without reading other responses.

Money is a was to normalize value assessments, providing a means of reducing the number of value relationship assessments in a given system from sum(0,N-1) to N, where N is the number of goods in the system.

For instance, if you have a system with 7 goods in it (Milk, Bread, 1 hr Manual Labor, 1 gallon of gasoline, 1 gallon of kerosene, a cord of wood, 1 pound of ground beef) you have to make 21 value relationship assessments (milk->bread, milk->labor, milk->wood, bread->wood, etc). But if you introduce "money", you reduce it to just 7 assessments (milk->money, bread->money, labor->money, etc).

12:

I always enjoyed Fransico D'Anconia's description of money in Ayn Rand's " Atlas Shrugged." I won't reprint it here since it is easily searchable online.

13:

Yeah, I reckon that was a Dunning-Kruger moment -- the stuff the author thought he knew, therefore didn't need to research (and footnote). Unlike most of the rest of the book so far.

14:

Someone (Robert Anton Wilson?) wrote that money is bio-survival credits.

15:

Money is not just a layer of reference indirect, a means of exchange or even a store of value.

It's a marker in the social game --- the ultimate marker, a symbol of symbolism itself. It's a god, it's status, it's value, it's power.

It's the basic unit of communication in modern human language. A picture is worth a thousand words -- but how many pictures is a dollar worth?

It does those other things -- but it can be used to do lots of thing. It started as an accounting marker for grain trade --- but only silly economists who have erased the 19th century from their minds believe that money "is" such a simple, rational thing under current modes of production (a clue as to who & when these fetishes fell apart).

16:

Hmm.

I notice most of you are trying to describe money as we use it in the culture to which we belong today.

Let me try and rephrase, then: where did money come from?

NB: Anyone who thinks that money arose as a formalization of barter exchanges really needs to read Graeber's demolition of that theory, pronto.

17:

Like RScully says. Also, money is real the way language is real. Which is to say, it is an agreed-upon system of symbols. The physical symbols, like printed texts, are not the thing itself.

My sense of Graeber (I haven't read him, and am hoping to avoid it) is that he is best in his own field, and lost outside of it, but that sure doesn't stop him from commenting outside it. There's a lot of good discussion of the book over at Crooked Timber. Favorite acerbic remark on the book over there comes from the investment banker Daniel Davies: "I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket."

18:

Money has the ability to extinguish a tax obligation.

Here's the quote in context from http://www.winterspeak.com/2009/07/california-scrip.html

Money has the ability to extinguish a tax obligation. A tax obligation is a creation of a sovereign entity. You charge a hut tax, and then invite the natives to work your fields in return for scrip which will, magically, if returned, keep their huts from burning down. The only requirement is that you can, honest to goodness, burn down huts at will. Does this sound like a "store of value" to you?

19:

Money is something I don't have much of.

I have a friend who is sure that money = gold. He says that paper money economies always suffer hyperinflation, though he doesn't seem to have noticed that even after hyperinflation economies seem to stick with paper. I think he's been reading goldbug sites uncritically.

20:

Well originally money was a resource in itself wasn't it? The English word Salary comes from [insert old language] for salt. As a resource salt was vital in ancient times as it could preserve food, it also had the advantages of being storable, long lasting, fungible etc.

So it used to be that "money" was a common resource that could easily be transported and divided. At some point this changed and money was no longer a resource in of itself.

21:

My opinion is that money is a standardized way to evaluate one's work. At is core: something that take 1 hour of work has the same value as something else that take also 1 hour of work.
Of course, the concept have been refined through the ages with concept of scarcity, talent of workmanship etc.

22:

That's the labour theory of value but it's clearly not true in the real world (possibly unfortunately). Instead many people work and get paid a tiny fraction that the fruits of their labour are then sold for by someone else, e.g. 3rd world workers who get paid a few pennies per item of clothing that are then sold for tens or even hundreds of pounds.

http://en.wikipedia.org/wiki/Labor_theory_of_value

23:

Latin would be the right old language for Salere, Salt.

24:

I suspect the answer to "where does money come from" doesn't have a definitive answer - it seems just too damn useful and I remember hearing someone say that the barter economy idea is just rubbish - barter economies grow out of money economies to avoid the tax man or similar.

So, I'm going to lay a bet that one of the sources of money comes from the need to pay tax/tithes or similar.

25:

I've been following the crooked timber discussion and it looks like an excellent book, but the quote is hilarious.

I know his explanation so I won't try and answer the question in case I spoil it for people. I'll just note that the Inca didn't have any money, and the size of their empire and public works programs were huge. Always worth remembering.

26:

"Money" is an abstract term used to measure another (somewhat less) abstract term - "Wealth", which is in turn used to measure (an even less) abstract term - "Influence" which is another abstract term et cetera...
Somewhere at the bottom of this abstraction well are two monkeys scratching each others' back.

27:

What makes money money:

The mnemonic:
"Money is a factor of things four:
A means, a unit, a measure and a store"

1) Means of exchange
2) Unit of account
3) Store of value
4) Measure of quality

With the proviso that you can do without its function as a store of value for a while (in times of hyperinflation).

28:

Ok, since no-one has said this yet, here is the definition of money that you will get taught in an Economics 101 class:

Money is
1) A measure of value
2) A store of value
3) A medium of exchange

I think Charlie's question goes beyond that, asking "what kind of money do we have and what does that mean for us". We use a fiat currency, based on debt. This requires us to be willing to buy the debt that government creates, which requires us to have confidence that government will meet its future obligations to us. Going beyond that, we also have a fractional reserve currency, where banks can create more money by piling more debt upon that government-issue currency, which further requires us to have confidence in the continuing ability of banks to pay us bank. You can see the cause of the current financial problem...

The other kind of money is commodity money. Gold is often that commodity as it doesn't lose value over time. It isn't always gold - a classic paper describing the use of cigarettes for currency is "The Economic Organisation of a P.O.W. Camp", published in 1945. It is worth a read for anyone thinking about what money is.

29:

Money is whatever we agree it to be, ultimately.

Right now, we think it's appropriate for bytes, with certain safeguards, to be money. In other places, it was pigs, gold, salt, feathers, or special rocks. Sometimes it's paper with ink.

The agreement is what makes it money.

31:

If you are asking what cultural forces brought about the creation of this abstract thing called money, then I think the answer is:

The sovereign. The king. That proto-mafioso who can feed an army of enforcers.

I haven't read the book in question (yet).

But that's my take on the idea.

32:

Money is just a method of putting a nations production to use. It's a tool. It certainly isn't anything real - eg its not “time”. The federal reserve can't create time. They can create money, and should ensure everyone has enough to keep the country as productive as it can be. The 2008 depression was entirely unneeded - we became unproductive due to lack of money, something we have an unlimited supply of. Contrast this with 2011 Japan which suffered a recession due to a the Tsunami.

33:

"where did money come from?"

The same place language came from.

In other words, it is the system of symbols that humans invented to work with particular classes of interaction. Non-sapient apes have trading behaviors and "ideas" of obligation, well, just as humans invested other sorts of interactions with spoken language, humans invested trading and obligation with the language of money--of number, really.

One of the illusions here is the illusion of number: we say because we use number to denote money, it's all money. This is like saying that since all languages use sounds, they are all the same language.

So the language of money changes over time.

34:

"Going beyond that, we also have a fractional reserve currency, where banks can create more money by piling more debt upon that government-issue currency, which further requires us to have confidence in the continuing ability of banks to pay us bank. You can see the cause of the current financial problem..."

Umm, no and completely upside down. We currently are under-inflated, not over inflated. Dollars and Euros are too good stores of value, pure rentiers can prosper, the current social hierarchy is continually reinforced, and therefore change (growth, investment, etc) is over-dampened.

Money is a verb, not a noun. Believing that it actually points at something --- that it reflects an underlying value rather than controlling access to that underlying value -- has been known to be deeply fallacious for a century and a half.

35:

Money is votes on how labor and resources should be applied.

36:

Hmm. Money is a representation of a resource, short and long term. It's also an illusion that enough people have bought into to make it sustainable.

37:

A good introduction to how thoughtful economists think about money is Kiyotaki and Moore's "Evit is the Root of all Money" available from Kiyotaki's web page at Princeton (and probably also from Moore's at Edinburgh), which can be located by a fast google search and also includes a simple theory of banking.

38:

The evit typist ate my l : it should be evil, not evit above

39:

A good introduction to how thoughtful people think about economists is Keen's "Debunking Economics" or Hill and Myatt's "The Economics Anti-Textbook".

40:

Money is Power. That phrase tripped lightly into my head from no-where in particular when I read our hosts initial entry and thence moved into a google search ... which produced this amongst other things ..


http://www.spiegel.de/international/world/0,1518,721158,00.html


The first entry on that google 'About 3,440,000,000 results (0.18 seconds)' is ...

http://www.marxists.org/archive/marx/works/1844/manuscripts/power.htm


Well who'd have thought it? ..

" By possessing the property of buying everything, by possessing the property of appropriating all objects, money is thus the object of eminent possession. The universality of its property is the omnipotence of its being. It is therefore regarded as an omnipotent being. Money is the procurer between man’s need and the object, between his life and his means of life. But that which mediates my life for me, also mediates the existence of other people for me. For me it is the other person. "

Maybe a complementary question to " where did money come from? " would be, Where did Debt come from?

41:

I'm not sure I follow you, do you want to explain that in more detail?

Coz here was me thinking that the Global Financial Crisis kicked off with the bursting of the US housing bubble, itself caused by Greenspan increasing the money supply by lowering the cost of government debt via a low federal funds rate. Fundamentally, they made too much money.

And if you want to explain to me why Greece hasn't taken on too much debt, then I'm all ears.

42:

Some of us might have liked living in an economic culture wherein rum was the medium of exchange and signification of credit.

Prohibitionists, however, would probably have preferred the rice economy, which somehow in the country, despite the several stand-ins for money that we've had, never did manage it with rice. Shoot, even corn was turned into the more economically exchangeable likker.

Love, C.

43:

Money?

It's a gas.

44:

Having just read some reviews of Bruce Schneier's new book, I would say money is just an extraordinary popular delusion. The only thing that makes it work is our collective trust that it will work. But it's a much better surrogate than the flawed individuals and corporations that we would otherwise have to believe in.

45:

A sign of poverty, duh.

46:

I’ve always thought money is essentially an abstract representation of time and effort. But then I took no economics courses in college and I’ve never read Graeber’s demolition of the barter-exchange theory, so what do I know?

Historically, I suspect money originated as a means of enforcing imperial stability. In any event, I would be prepared to argue what it meant then isn’t as important as what it means now.

47:

My pet theory, since you were asking:

1) Empirically, money is a token that can be exchanged for the necessaries and conveniencies of life (e.g. goods and services). The offerer of the service or good gets hold of the token and can exchange it themselves. Since individuals often cannot make goods by themselves (or tokens for that matter), tokens can be acquired by rendering services to manufacturers of goods.

A problem arises, however, since the number of tokens to exchange for goods or services is universally and necessarily larger than the number used to manufacture the good or render the service.

2) This can be down to profit motives or lack of information (hence: entropy). In the latter case, the increase of the number of tokens reflects the entropy of demand (of the product) and supply (of what is necessary to make it). The profit motive enforces that only such transactions take place, in which entropy of the system as a whole increases.

3) As such a system will inevitable stall at some point, there must be an original source of tokens and possibly a final drain for tokens.

4) In situations where a connection is (or could be) established between two systems in which the entropy of tokens is different, but can't for lack of tokens, neutral pairs of virtual tokens can be created via the debt mechanism. The debtor receives tokens and the creditor "antitokens" that can be redeemed with tokens. The profit motive (2) ensures that tokens received must have less entropy or greater in number. (Tokens of equal number but with less entropy can be exchanged for more tokens of equal entropy, so this amounts to the same.)

5) In practice, the lack of information on future economic conditions in practically all transactions, must lead to a constant increase of the number of tokens. If original issuance of tokens falls short, the debt mechanism will create more tokens and antitokens. Since the latter need to be redeemed, this is self-perpetuating.

[Debt explosion.]

6) If the entropy of the original issuance predictably outstrips the increase of entropy in the economic system for a long time, the entropy of original issuance is too great and the profit motive precludes further transactions.

[Hyperinflation - you're printing money (lowest entropy) so fast, that the issuance of money creates more entropy than the whole economy ever could and everybody who wants money just waits for it to be printed, why work? This is also the mechanism in a debt spiral, where taking on debt becomes the most reliable way of getting money/tokens and transactions cease when people realize that issuance outstrips by far the creation of debt/antitokens.]

7) A final drain for tokens (as imposed by policies/rules) can direct the exchange away from certain transactions. This is usually done by redirecting certain numbers of tokens away from a transaction (the profit motive is untouched by this fact) or an agent in general. If the drain perpetually outstrips the issuance, transactions will cease as tokens held by an agent (or hidden, or brought to Switzerland) will lose entropy, as the desire for goods and services stays the same, while the number of tokens decreases. (Deflation spiral - see Great Depression or Greece.)

So much for my pet theory.

48:

Money started as a commodity future. Governments decided that it was merely a store of value so that they could issue their own to pay their troops.

49:

Some authors write trashy romance novels. Therefore all authors write trashy novels. Nice bit of logic, there.

50:

Money is a convenient way of keeping score.

That's the "medium of exchange" in a nutshell. I don't like "store of wealth" so much, because that is the start of a chain of misunderstanding that ends with the Libertarian pursuit of "currency with intrinsic value" (i.e., goldbuggery).

51:

Money is an ill-defined term. Like Love, Justice or God.

52:

How about "money is a marker for where energy has gone and is currently located"?

53:

Then you can't account for changes in its value (deflation/inflation).

54:

Money is a shortcut for accelerating exchanges.

55:

Actually, they said it's a store of value, because that's what they thought it was. To the point of ruining their country (e.g. 17th/18th century Spain).

Adam Smith pointed out the folly in this, after defining wealth as the annual supply of labour and its application towards a useful end and describing the exchange of money as part of the process, without giving a definition as to what money is.

56:

Money is crystallised energy in a form attractive to human beings.

57:

Then try to explain what happens when you buy a gold ring and sell it at a loss.

58:

OK, I get it. (And I've "Debt" on hold at the socialist book depository, so I'll, as usual, always be behind).

Money is what I shall do for on you Tuesday, for a hamburger today.

59:

I think of money as a credit statement that a person has completed work of X value, where "work" is anything people get paid to do (sing a song, install car parts on an assembly line, run a company, etc).

This allows people to specialize, so that they're not dependent on a barter system, which can only work locally. Barter allows people to contribute collectively to a single product, but they don't have to be together to make it happen. You write a book, the publisher produces it, the retailer sells it.

A reader doesn't know he needs a book production manager; he just buys the book. That money works its way upstream until a fraction of it lands in my paycheck.

Money can multiply through the process of savings accounts and loans; but at root I think it's just a way of permitting barter to happen over larger distances between people who don't have exact trade items.

60:

Money might not serve as a method to make trade easier. It might serve as a method by which outsiders CANNOT benefit from your internal demands and success.

If you and your country are doing well, you will have wealth and demands for goods and services that your society largely supplies. But even if you are a trading society, you would still ideally want to avoid outsiders then spotting this and flooding your market with goods that your people then buy and which may then compromise your territorial strength, trash your indigenous production capacities, drain your liquid capital and so threaten your independence.

The idea of trading in Gold is accepted amongst most nations because it is rare everywhere, and so any source of gold is as good as any other, it is a universal source of value...However, Gold is not used everywhere and everyday, as paper money is more convenient, and this convenience leads people to the idea that paper money is "more efficient" even when others, as stated, have comprehensively illustrated that it isn't. So what is the real reason for having it?

If you don't want outsiders coming in and wrecking your economy through flooding your market with their commodities, money serves as an internal security against this. Barter is not possible unless a numerical value is attached to the items and so we are set on the idea of quantifying value, from which money is then logical. The question is then one of "Whose Money defines value" then arises.

Once that is agreed, if you physically have none of the desired money for my goods, or don't want any of the crappy paper tokens that I'm offering to give you in return for your valuable stuff, I and my people won't trade with you, as both fiat money and gold are more portable than any barter goods: Hence, If you won't take my paper, I will just move on and you lose out.

Money is an aspect of tribe/gang/community identification, and from that, nationalism, as it becomes an internal system of economic exchange that helps isolate a people and their wealth from outsiders. To participate in the life of a location via their system of exchange requires engaging with their exchange medium: Their money.

Money doesn't make trade easier, it actually makes it harder, and hence, makes it secure against just any pack of outsiders who might show up. From there, it acts as a social consensus against anyone who is not a member of "your" society, who individuals and the government cannot trust or control.

61:

Money is something people do, not something that is. However, it is not always most easily thought of that way, presumably because a lot of effort is made to make it object like, and because a lot of people think of it as object like.

62:

Money is a messenger particle. In the way that fluid flows are "told" which way to move by pressure (and the pressure waves that propagate back along a system), money "tells" labor, and the resources produced by that labor, which way to flow. It's not really a store of value, the underlying assets are the stores of value. The housing stock, the computers, etc. The large numbers in bank accounts are simply promises for past labor done (or past gambles that paid off).

But the components in fluid dynamics are rarely trying to game the system, which isn't true with money. If ever a system becomes too "unfair," with too much of the underlying particle stock held by those not producing current value, the participants in the system can (at great expense) switch over to another feedback system. Witness the various bits of depression scrip that popped up when the US economy in the 1930s broke down.

63:

I don't know if some people upthread think money is a closed system, but some comments read that way.

It's not closed. Additional items of value are created and destroyed all the time, and not necessarily at the same rate. Sooner or later you work all the way back to the raw resources that produce a thing, and that resource is either limited by how fast it can be harvested (trees, petroleum) or if so little of it is left (whales in the 18th century, petroleum sometime this century) that it becomes worth the effort of finding a replacement.

The law of entropy has to be observed, sure, but Earth isn't a closed system.

64:

We don't know for sure where the concept of money came from or when it appeared. It predates written culture.

It's like saying "Which came first, music or dance?"

65:

Ack, and I see the underlying question has shifted. But I imagine money came about once society scaled to the point where we could not easily keep track of all the various obligations we owed others. At a small scale, money is unnecessary. I do favors for you, you do favors for me, and if one of us feels that the balance has gotten out of whack, then family reunions become uncomfortable until things are resolved, or other social pressure is brought to bear.

But once the number of obligations becomes large, then we need an additional messenger particle outside of our brains to keep track. So money enables our society to scale, and allows large numbers of people to trade that will only interact that once. This also allows favors to be effectively forwarded. It also allows people to start gaming the system. As long as the system is not gamed too hard, everything scales smoothly.

66:

Money is a standard of value defined and enforced by a public agent, be it communal agreement or formal governance in form.

67:

Money is anything that people can agree on the relative value of, and is easy to move/exchange. It is just more efficient to have one or two things that you compare everything's value to, rather than comparing everything's value directly to everything else.

At least, in a pre-computing environment. Now you probably could have everything directly value related to everything else.

68:

It is a word.
One which seems very important to lots of people, although how important tends to vary depending on the person.
The word debt is even more interesting.

69:

"Money" is an indefinite article, like "Terrorism" or "Drugs".
The US hasn't got round to declaring a War on Money yet, but it's certainly done a good job of minimizing most Americans' contact with it.

70:

I've read about 85% of the Graeber book, so I'll refrain from just stating his points, but I will say I'd never really thought about money in any detail before, so that in and of itself has been a huge benefit of getting the book. I've found it very very interesting, to say the least.

I will say the idea that money was an abstraction unlinked from any single specific physical object or objects of value has always kind of just felt like common sense to me, but that's about as far as i thought... which i regret.

I have to say, I'm really looking forward to reading what Charlie has to say about it. Guess I better finish the book quick so I can engage thoughtfully.

71:

What you have to understand is that in those days "laptop" was another term for cat and "notebook" was a device made from felted wood pulp for storing text and images. Both terms have now come to refer to the electronic devices which serve both as cosy-warm cat seats and a means to store pictures of said animals. Jobs and Wozniak were able to exchange some particularly affectionate laptops for an ongoing supply of copper rods -- copper rods can never replace a laptop, they merely symbolize the irredeemable debt -- which were essential materials in the making of early personal computers.

72:

The earliest money started out as religious tokens or lucky charms and later became a convenient medium of exchange for goods and services.

The temples and local Shamans issued charms and tokens for good luck, health and long life. This practice continues in many areas of the world even today. Its very "unrealness" is what made it so convenient as a medium of exchange. It wasn't tied to anything physical for its value, only to beliefs and desires. In the minds of its users it had an "eternal" value which wasn't locked in to ephemeral goods and services. This is how gold got its value as well, it's a useless metal, but it doesn't tarnish and is ideal for making tokens that last 'forever'.

Because it had no 'real' value, it was ideal as a way of advancing 'Good Juju' at no real cost in return for a payment in real goods and services later. Thus came debt and the rest is history.

73:

Having looked at some of the Graeber polemics, I have to say that his position reminds me Jared Diamond's _Guns, Germs, and Steel_.

I think my previous answer ("money is a convenient way to keep score") holds up well in this context: the breakpoint is when your community becomes too large for more social methods of debt resolution to function.

Graeber notes that early-monetary cultures tend to be sticklers about price mainly when social relations break down: if the law prescribes wergild in lieu of blood-feud, you want to make sure you have a full and exact accounting. Correspondingly, one of Diamond's points is that governments and other institutions of social organization serve primarily as a means of conflict resolution -- with higher population density and larger groups necessitating more complex government.

So, I would guess that any culture with large enough social groups will invent money when keeping score by counting crosses some threshold of being more convenient than existing, more-qualitative, social debt-resolution methods. And, we will keep using money unless something greatly increases our ability to resolve conflict, reduces our social density below that threshold, or comes up with something yet more convenient.

74:

Money is the signaling mechanism we use to plan the utilization of wealth for the future production and distribution of goods and services

75:

Money is the fungible, liquid, and physical instantiation of attainment.

76:

Maybe it is the distilled product of energy captured.

The physical evidence of the origin of money seem to be about markers for surplus production of resources. At the same time the markers are representing the utility of energy captured in (or by) a marketable product.

This seems to me to be the kernel of the power. Money is credit towards the direction of energy by man. Everything else is culture

77:

That sentence isn't in standard English (although trying to break it down into parts did show me that I can't define "fungible"). Could you please define your terms?

The term "physical" fails to account for money of account and paper or digital transactions. This is a very old idea (A owes B 10 minas of silver, A sells himself to B for 10 minas, A is no longer in debt but no money has changed hands) and Adam Smith noted the advantages of minimizing the amount of money which has to be kept to hand in physical form. Today, physical money is so small a part of the money supply that mints are allowed to print however much is needed.

78:

What is money?
Money is a socially-agreed form of stored energy.

Where does it come from?
No idea. I rather like the notion that it came about when people started to move about and needed to take an approximation of one element of their relationships with them. But of course that could simply be fantasy.

79:

I think money arose as a way to delay the completion of an exchange of goods, a way that was more accurate and longer-lasting than remembering the size of an obligation. So if Arg brings a deer back to the tribe and gives a haunch to Bog, they can agree that a fair exchange is represented by a dozen cowrie shells, which Bog can exchange for flint to make axe heads. If Bog doesn't have any axe heads currently made, it's easier to have an intermediate form of exchange than have to negotiate the value of the axe heads when they're made and have to find something else to trade for the necessary flint.

80:

Charlie, on the Kindle, what attracted you to it when the iPad already stood up to you as an e-reader? Was it a size issue?

Regarding money, there's the island of Yap where giant stones were used as currency. They were too large for you to roll around, though, so ownership was just something that was commonly understood: if you were given one then essentially all that happened was that everyone agreed that the big carved rock, which was once Bill's, is now yours. So obviously there's this element of community and ritual to money. But if we're asking where money came from, then who carved the stones and for what motivation? I wonder if money isn't, to some extent, a unit of material inheritance, whether cultural (carved stones), geological-astronomical (diamonds and gold) or calculated (recorded in ledgers and databases). The stone-carvers didn't make the stones for money, but they left behind wealth which could then be unitized and re-issued as a monetized inheritance.

Perhaps the process of sub-dividing wealth after death is what made money happen?

[http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money]

81:

I'm reading http://www.nakedcapitalism.com/2011/08/what-is-debt-%E2%80%93-an-interview-with-economic-anthropologist-david-graeber.html
He's not being very convincing.

"If you define money in the broadest sense, as any unit of account whereby you can say 10 of these are worth 7 of those, then you can’t have debt without money. Debt is just a promise that can be quantified by means of money (and therefore, becomes impersonal, and therefore, transferable.)"

Uh, you have debt without money: "I owe you 10 of these, because I borrowed them from you."

"I’m an anthropologist and we anthropologists have long known this is a myth simply because if there were places where everyday transactions took the form of: “I’ll give you twenty chickens for that cow,” we’d have found one or two by now."

I thought observed trade *between* groups followed just this pattern. We put out X, you out Y, I take some of X away, you adjust Y, eventually of us takes our pile and goes home or takes the other pile and goes home. (Or I suppose takes both piles and starts a little war.)

"Think about what they’re saying here – basically: that a bunch of Neolithic farmers in a village somewhere, or Native Americans or whatever, will be engaging in transactions only through the spot trade. "

Cuz Native Americans are socially primitive and didn't have money-equivalents in the form of wampum and cacao beans and cotton cloth.

I'd want a story of money to explain Egyptian barley/bread credits, Near East gold and silver, Viking silver, Chinese cowry shells then silver then paper money, African iron, Yap stone wheels, Mesoamerican cacao and cotton, North American wampum... Does Graeber?

82:

Formula is correct, but (N choose 2) might be a more intuitive way of putting it.

83:

And yes, Roman salt-salary, and Japanese koku (bushels of rice), and prison cigarettes, or these days prison canned meat or something (for protein, because of all the body building).

That interview has him talking about virtual money vs. commodity money, and cycling between the roles. I get the impression he's pushing money as debt (virtual), yet that distinction could suggest money has multiple types of origin. Some places starting with a government creation of tax obligation, others starting with a high-value portable good that people find facilitates trade, both being usable in the other role in the end.

***

Money is the paradigmatic magic of the Syndicate. :p

Money is oil for the engine of the economy. Too much and the engine floods, too little and it seizes up.

84:

Okay, in the comments he says

"I actually claim there is no single origin of money, it’s a confluence of different innovations in different contexts converging around a single logical principle of proportionality. I can describe what existed at the time of our earliest records and give reasons why it would not have emerged from barter (spot trade), but I don’t have a single story of what must have happened over the proceeding probably several thousand years that laid the groundwork"

85:

Sean Eric Fagan writes:

Money is time.

Ha. I recently got a little chunk of money; time went AWAY.

Apparently, money is anti-time!

86:

Money is a myth, that attracts math, and thence the two varieties of economist-priest.

It's a very attractive myth, one that we all believe in and follow very carefully. But it's a myth.

87:

I would guess from the title of the book mentioned in the blog (which I haven't read, or any reviews of) that the thesis is that money is a way of transferring debt or indebtedness. Money is not IOUs because debt accrues interest. Pay me now and that's it, pay me later you owe me more. Thus inflation. Old money is worth less if you keep it in the tea caddy instead of moving it around.

88:

Money is stored work.

89:

Coming from Simmel and Luhmann, money is a generalized medium in which communications happen, in a code of payment/non-payment, sustaining the financial subsystem of society that builds upon financial transactions following financial transactions.

90:

Money is a form of rationing scarcity.

91:

I'm told that money originated as receipts, in the Fertile Crescent area. Certain kinds of goods can't conveninently be brought to the trading floor, say, cattle. So you park your cattle in a holding pen and get a receipt for them from the scribe there. You go and look at other stuff, and then go to the trading floor and haggle. When you strike a deal, you trade *the receipts*. There are scribes on the trading floor to "make change": split or combine receipts. You take what you come away with back to the holding areas, show the guards the receipts, and take your stuff. According to the same source, government taxes were originally collected directly as goods - cows, rice, etc. So the money originated for private trade, not for taxes. But, I freely admit, I wasn't there.

92:

Having mulled over Graeber's "Debt" for a little while, I can't help feeling modern money is just the truck system on a national scale. Here in Australia the "dream" is to own a house in suburbia and raise some children. Home ownership requires taking on a debt, and house prices are manipulated by the political process.

It's possible to repay this debt and the expenses involved in raising children, with a little left over for leisure, by working reasonably hard. We make sure of this by having a minimum wage and the government trys to make sure there are plenty of jobs available.

A governments that fails at these things is given the boot in short order.

888. 8 hours work, 8 hours recreation, 8 hours rest. We put up statues to this ideal. Our culture sees work as a moral good, and a manageable level of debt serves as motivation in a morally improving fashion. The workers are in control, but it's still a great big truck system.

93:

I have a lot of time for the post Keynesian view of money:

Money is a non-reproducible liquid asset that I can immediately convert into consumption or immediately use to settle debts.

Money is something that provides me with utility because I know (or strongly believe) that I can use it to settle any debts or future liabilities, even those I don't know about yet.

There are three reasons to hold money:

1) Transaction
2) Precautionary
3) Investment

1) refers to those expenditures I know I will be making in the near future. 2) refers to my desire to hold cash in the face of an uncertain future. 3) refers to my desire to hold money as an investment (e.g. I might think there will be a deflation in all other asset classes, therefore money is the best store of value for my wealth going forward).

The unit of account is set both by convention (e.g. cigarettes in prisons, which have zero elasticity of production as far as prisoners are concerned) and by the action of a state (or whatever local entity wields a monopoly on the legitimate use of force).

94:

Money is any commodity that can reasonably be stored, can reasonably be transported, is fungible, and can be created or destroyed at will. This type of commodity allows for standardizing units of exchange.

95:

Neal Stephenson's System of the World[1], obviously. These days I think I'm more interested in "Currency" than "Money". And we should be particularly interested in the process of commoditisation whereby the flow of money is hidden behind layers and layers of "paper". And "paper" is an anachronism, as we really mean contracts held electronically.

Money is not debt, time, work, fungible commodities, liquid assets or whatever. It's an idea, a shared consensual hallucination.

[1]Nearly to comment #100 and nobody's mentioned Accelerando? Has the financial industry started automating the creation of companies, contracts and derivatives yet?

96:

Damn, beat me to Neuromancer quote! :P

97:

Money is a score sheet.
[ As well as a medium of exchange, short-circuiting barter ]

Problem, the people doing the "official" scoring may alter the values.
As they do in exam-grade inflation for example.
Or deflate the currency
Paper money is no different from Metal-money (which was "assumed" to have an intrinsic value) because it could be adulterated with less-valuable metals.
It's still inflation.

Could one reverse-engineer money, as by taking the British "standard" basket-of-goods used to measure inflation, and making that basket the standard, and pegging money to it, rather than the other way around ?
Um.

Or taking the average working week and people's labour over the whole popualation.
Does one use Mode / Median / Mean values (in increasing order) or a weighted average-of-those-averages?

Try reading "Paper Promises" by Philip Coggan?

99:

"Money isn't everything."

"Of course it is. That's why they call it 'money'."

100:

Money: an accounting unit indicating the amount of inputs (effort, resources, tools, reputation, etc.) you have expended for the benefit of someone else with the expectation that a similar amount of inputs will at one point be expended by someone else on your behalf.

Note that it then makes sense to separate the cost of something (the inputs sacrificed by the producer) and the value of something (the benefits from consumption felt by the consumer).

101:

Money is one thing trying to fill at least three or four different functions with conflicting requirements. As a result, it doesn't do a good job of any of them...

It's a means of exchange, but in some communities there's not enough (see LETS, an ad-hoc fix to this problem) and in others there's presumably too much.

It's a store of value, but due to inflation it's not a very good one.

It's a measure of value and a unit of account, but as soon as any amount of time is involved it has to be adjusted for inflation so the real unit of account is actually "inflation-adjusted money".

It's a standard of deferred payment, but the future rate of inflation is unknown so it's only really a standard in that both parties have agreed to it and, well, one of them will be lucky.

102:

You think value doesn't suffer from inflation?

103:
Money has the ability to extinguish a tax obligation.

In many places, it also extinguishes private debts; if repayment is proffered in legal tender and the creditor refuses it, courts will consider the debt repaid.

104:

I'm not sure if this is equivalent to the "formalization of bartered exchanges" but I was under the impression that money came from laziness. Not as a formalization but as a byproduct of bartered exchanges- essentially it started as a placeholder item.

Thinking about it, though, I keep thinking of that Pacific Island culture where they have "coins" that can weigh several tons- made of intricately carved stones. Without going into exhausting detail, I would imagine the question "where did money come from" has the same answer as "where did language come from": many different places at or around the same (either) time or condition.

105:

The word debt is even more interesting.

Yes indeed ...

(I'm continuing to take notes on what people think money is. To those of you who've read the Graeber book, I'd be grateful if you could mention it in your comments.)

106:

And we have a winner!

(You've read the infamous paragraph and kept on going, for which, kudos.)

107:

Charlie, on the Kindle, what attracted you to it when the iPad already stood up to you as an e-reader? Was it a size issue?

Yep.

The iPad is physically too large for comfort as a reading device -- it's great for other purposes, but the combination of the sharp lower edge with the weight, and the lack of pocketability, make it sub-optimal. I've been using e-ink readers for years, but they're also sub-optimal due to display lag. If Apple made a 7" iPad I'd grab one in a shot -- but they don't, so the Kindle Fire is the next best thing (at least for reading).

I can't justify buying a full-fat 7" Android tablet as well as the iPad -- "full fat" meaning one with 3G, bluetooth, a significantly faster CPU, and the ability to do cool shit like, er, playing games or editing Word documents -- but the KF fits the minimum spec for a modern backlit LCD ebook reader, and they're selling them more or less at cost. (A Kindle Fire in the US cost me what a Kindle Keyboard sells for in the UK.)

108:

Money is a system of restricting access to resources. In effect a mechanism to control inflation or price increases.

Don't fall for the idea that future tax revenue are required to pay-off government debt. In fact, it is a myth that taxes "pay" for any government spending.

When an economy is at 'full capacity', (i.e. very low unemployment and all resources in the economy being used productively), a government may wish to spend say £20Bn on something everyone agrees is needed - it could be repaying govt debt, defending the country, building hospitals, whatever. When it spends this money it inevitably causes inflation - this is because you have more spending chasing the same amount of goods and services. The amount of goods and services does not change because the economy is already at full capacity.

To enable the government to spend without causing an inflationary spiral, the government taxes by an equal amount to prevent the private sector spending by the same amount - so overall the spending (public and private) remains roughly constant, so no inflationary spiral.

So the extra tax is to prevent an inflationary spiral when the economy is at full capacity - it is not required to "finance" govt spending. This is why government economics is nothing like household economics.
However, when an economy is the position ours is in with excess capacity, spending by government is permissible without taxation as it doesn't cause inflation.
Given that our economy has not been at full capacity for over 30 years (hence the high unemployment), the government does not need to increase taxes or cut spending elsewhere to "pay" the interest on govt debt or to "pay" for anything.
The big question is why does the government issue bonds at all and pay interest to private investors? Why doesn't the government just create the money at the mint or Bank of England - this won't be inflationary as there is spare capacity.
An answer often given is that when governments issue bonds someone has to surrender money to the government. If it wasn't for the bond that money would probably have gone into the banking system instead. This is called a 'reserve drain' and was clearly necessary when we had the Gold Standard/Bretton Woods or some other type of Fixed Exchange Mechanism.
The argument given now is that debt is a better way to stimulate the economy. Supposedly there is a problem with a liquidity trap in the banking system. By issuing bonds the government can take money away from the banking system and make sure that it is being spent.
However, it's pretty obvious that for countries with their own floating currency, deleveraging banks and with economies working at way, way below spare capacity that you can use QE to clear government debt at will without any inflationary effects.
This is obviously in the UK since there is £275 billion sitting in the Asset Purchase Facility. This money was bought using reserve crediting in 2010/11 and the result of the purchases was deflationary - M4 last year after £200 billion of QE had hit stall speed with growth at only 2% (more than 5% growth is needed to prevent the economy contracting).
So we are left with a ridiculous situation where the Tories are moaning about the huge and "unaffordable" government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. To add to the hilarity the Treasury, through a wholly government owned agency called the Debt Management Office pays interest on the £200 billion in the APF to the wholly government owned APF. This money is just building up and will eventually (as all profits for the Bank are) be returned to the taxpayer. You couldn't make this up.
So clearly in economic circumstances such as now you can print money directly, buy outstanding government debt and retire it with no inflationary consequences. Nevertheless Governments are continuing to use an explanation built up at a time of Bretton Woods with full employment, fixed exchange rates and no deleveraging to explain why they don't use the QE to clear down debts.

109:

There are only two ways to create money in the UK economy:-
1) The normal process of credit creation carried out by banks - banks lending out more money that they charge interest on. Apart from minting coins or printing notes this usually creates over 95% of the money (called M4) in the economy.
2) QE - The Bank of England crediting its reserves with money and then using the credits to buy assets or outstanding government debt from banks.
Since 2008 banks have largely shut down credit creation. M4 which normally grows at over 5% per year is only growing at 2% per year. Expansion of below 5% pa means the economy contracts. This is by and large, as in all t after a financial crash, why the world and UK economies are in such a mess.
The line that our Government (and now several others) are giving us is that There Is No Alternative to austerity and cuts. They are justifying massive tax rises and catastrophic cuts in public spending because they say excess government debt, built up due to the massive worldwide recession in 2008 and the cost of bail outs, must be paid down.
This is obviously false as Governments can use QE to buy up government debt from the banks that are holding it and retire it. This is happened to a massive degree already in the UK with over a third (over £275 billion) of the UK's government debt is currently sitting in the wholly publicly owned Asset Purchase Facility.
But what about inflation? Wont retiring government debt in this way cause inflation? No- if there was inflation it would happen when the Bank of England bought the government debt up from the banks. This is the moment reserve credits are released and there is an increase in bank liquidity. We have done £275 billion of QE (equivalent to about 20% of UK GDP) since 2009 and M4 has contracted and we are at risk of deflation rather than inflation. Quite simply no matter what we say to them banks don't want to lend enough to get the economy growing.
So it is perfectly safe to retire government debt when banks aren't creating enough credit in the economy. If this is a natural phenomena because the banks don't want to lend (they are deleveraging) it is safe to retire government debt. As long as the money supply is kept at around 5% all is well - the economy neither contracts too quickly causing inflation or collapses causing a depression.
It is also perfectly safe at a happier time in the economic cycle. Say in 5 years time when the economy is expanding, banks are lending too much. At this point we would want to use QE to expand the money supply as we would want to restrict bank lending to ensure we never get another crunch like 2008. When eventually we need to increase the capital adequacy levels in banks (to make them safe) we will need some mechanism to ensure the money supply is kept expanding at the needed rate (5%) we will need to use QE to retire government debt.
The most depressing thing about this is that the current Government is misleading people so badly about how the money supply and economy work. The analogy of a National economy and household one is - the only word I can think of is evil. This is an action of people who represent their corporate funders and want to mislead you to prevent you questioning in who's interest they are acting.

110:

Cuz Native Americans are socially primitive and didn't have money-equivalents in the form of wampum and cacao beans and cotton cloth.

Go read the book; he goes on at length about the nature of "primitive currencies" (the old anthropological term: modern term is "social currencies") and specifically discusses the role of wampum and cloth. TL;DR version is that he identifies fundamental differences in the role these currencies play as placeholders for social relationships that aren't necessarily interchangeable with other types of goods or services.

(It's always unwise to confuse an interview -- the author speaking informally, off the cuff, and being transcribed by a journalist who may or may not be editing the stream -- with a researched and edited document.)

111:

Am I too late?

I was going to say "An excruciatingly unfunny practical joke which either nobody's rumbled yet or everybody's too polite to mention" but I fear I may have missed the boat...

112:

There is no finite amount of "money". 97% of the money supply is electronic credit created by banks with no corresponding assets to back up the money created. The banks are able to create this money in response to demand and the limits on them are the demand for most (set by policy interest rates in central banks) and the liquidity reserve ratios set by regulators and governed by the Basel 3 framework.

This is what causes the economic cycle. Banks lend too much (causing debt and inequality). This causes inflation. And usually central banks have to step in to put a lid on wage price spirals by reducing the demand for credit by increasing the price of money by increasing policy interest rates. This causes a recession.

Alternatively you get what happened in the 1930s, in 1990s in Asian or across the world in 2008. Here demand for credit was allowed to expand too much. Inequality and instability increased without central banks pulling the plug. The end result is that eventually the system is so unequal and unstable that the system implodes. Because banks only covered 3-5% of their assets (the money loaned to us) with liabilities ( deposits or collateral we gave the banks) instability causes bank runs wherepeolwpanic and try to withdraw any deposits they have before the banks go bankrupt.

This causes massive shock to the real economy as the value of all asset classes fee ds on the degree of money in banking systems. If we don't know what assets are worth they tend to go down in value.

The key point though is that in our curent economic systems we have unwisely allowed psychopaths in commercial banks to control the money supply. They do not use it responsibly and that is why we have recessions, inequality and depressions

113:

Money is an unfulfilled promise

114:

Banks and central bNks also have their own currency called reserve credits that you and I can't use. Is important to understand this as for every £ in the real economy there is a parallel central reserve credit. It underpins everything working in the economy. This type of money can be created at will (by central banks) in order to ensure liquidity and meet the parallel expansion of money created by banks through fractional reserve banking and credit creation.

Eg

All commercial banks have accounts at the Bank of England called reserve accounts. These accounts are used to settle up payments between banks and between customers at different banks.

For example say Jane banks at Barclays and pays £100 to Tom at RBS. 

So the way all modern banking works is that Barclays let RBS know they need to credit Toms account and deduct £100 from Janes account in RBS. But the banks also need to keep accounts of the assets and liabilities they are holding so Barclays also needs a way to translate the £100 asset they are moving across to RBS. The way this happens is that Barclays moves £100 from its reserve account at the Bank of England to the reserve account in the Bank for RBS.

When there are lots of transactions in the banking system sometimes thenBank of Aengland needs to inject money into the system to ensure that all the settlements can proceed smoothly. As the reserve accounts are only usable inside the Bank itself they rarely effect the real economy outside.

It's the same with QE. The Bank of England creates say £50 billion and offers to buy up outstanding government debts from banks. The banks hand over the gilts to the Bank (who effectively hide them in the wholly publicly owned asset Purvhas Facility). In return the reserve accounts of the banks are credited.

This does not necessarily have any effect at all on the real economy. Our banks at the moment owe literally hundreds of billions of pounds to each other. A lot or most of the crediting from QE has been used just to cancel out debts between banks - called improving their liquidity ratios. This should (if the banks doesn't act like lunatics of which there is no sign) act to make the banking system Marie stable.

Reserve crediting is not at all like "pumping money" into the economy. If there is no demand for credit or banks are unwilling to lend what we see is what has been happening for the last 2 or 3 years. The money supply in the real economy is shrinking rapidly despite £300 billion of reserve crediting by the Bank.

115:

Money is the promise you make to someone in exchange for real goods and services.

117:

I haven't read Graber's work, but years ago I wrote an small essay on SF societies that supposedly were able to grow and prosper without money (no, it had nothing to do with Star Trek)

Basically, we apply the label "money" to different things, or concepts if you like, all useful but different. You can perfectly conceive a society in which gold&jewels are the store of value, silver and copper the mean of exchange, and a virtual, abstract unit is used for accounting. That would actually fit quite well with the situation during the late Middle Ages in some places, Castile for example.

But all three concepts converge in one thing: scarcity. We use "money" to allocate scarce resources and to measure scarcity. In more than one sense all money is equivalent to a ration card. That's where power enters the stage...

118:

Well, I'll go old school. Money is a commodity, just like any other. back in the day of the metallic standards, its value was the socially labour-time to obtain a lump of a standardised weight of gold (or silver). Historical fun-fact, it was Isaac newton who standardised the ratio of Gold to silver in Britain that gave us 20 shillings to the pound.

Anyway, this persisted until 1973, when the US abandoned metallic conversion. Now, all that remains is the fact that cash can still be used to purchase metallic value (and other goods). At base, though, it remains a commodity.

Incidentally, banks don't create spending power beyond their assets: they can extend beyond their cash holdings, but ultimately, they cannot lend beyond their ability to repay.

At most they can do what you can do, when you write an IOU (if you don't have the means to back up an IOU you can be convicted of fraud).

119:

As an Irish resident, oh yes they bloody well can. And have. And stuck us with the bill...

120:

In the case of Ireland, and the whole banking collapse, two things happened. Firstly, the value of collateral vanished, much like if you offer to pay for a round and then find the money's fallen through a hole in your pocket. You thought it was there. Secondly, a run on withdrawals meant there was a time mismatch, meaning that they didn't have enough cash in hand to meet demand over the counter.

Further, the fact that they went bankrupt proves my point, if they could just magick money out of the air, they would have done so, they went arse over tit precisely because banks cannot create spending power.

121:

Money is a method of treating the symptoms of depression, without having to put any nasty chemicals in your body.

122:

Red - banks can and do lend beyond their ability to pay. They hold deposits only covering a very small fraction of their potential liabilities. That is what caused the crash in 2008 when banks froze the wholesale funding markets because they were all petrified that an unknown number of their number were insolvent.

Banks create credit freely in response to demand with no limits except what they are caught and forced to admit by their regulators. Seeing as the shadow banking system ( a distributed network of hedge funds owned by banks but registered in secrecy havens often using blind trusts) is as large as the formal warehousing banking sector the level of leverage is astronomical.

In addition the scale of "investment"/speculation by banks in derivatives dwarfs the total size of the real economy by an order of magnitude.
Before 2008 they suspected they were too big to fail. Now they know.

Worldwide, there are $70 trillion worth of derivatives in play at the moment - be they on mortgages, sovereign debt, etc. At this scale of gambling it will not take a lot to bring the whole system down again.

If any systemically important organisation (bank, country, insurer, etc) triggers a "default event" it is very easy to start a chain reaction. This is what caused the credit crunch in 2008 when interbank lending dried up due to fear of the chain reaction.

For every person that takes one side of a derivative such as a CDO or CDS somebody else takes the other. Once a payment is triggered by organisation “A” defaulting, organisations with losing side CDO/CDSs taken out against “A” then have to pay their counterparties with winning sides. If some organisations (“B” and “C” for example) have gambled too wildly and the cost of honouring the derivatives triggered by “A” is too high then B and C may go bankrupt too- triggering the next layer of events a D and E and so on.

In practice it is much scarier than this as derivatives are not traded on open exchanges. They are over the counter and there is no public declaration anywhere of who has taken what derivative bets or who their counterparties are.

This is appalling because it means whenever there is a realistic risk of a “default trigger” on any large systemic organisation (e.g. one that a large number of derivative bets have been taken out on) in the world the interbank lending market will dry up. All the banks and insurance companies with their $70 trillion gambles will refuse to lend to each other. Quiet frankly they all become terrified that the domino default effect will occur. The fear is that any money lent to anybody else might never get repaid.

As banks operate by fractional reserve banking they only hold deposits that cover a tiny fraction (perhaps one fortieth if the shadow banking is included) of their total liabilities. Real world depositors know this - they know that if banks are scared enough of domino defaults that they won’t lend to each other that there is a real risk that only the first customers that withdraw their money from a bank are going to get anything out. After the first 2.5% of the total savings in the bank are withdrawn the bank is effectively insolvent.

As the interbank market has dried up, the banks are unable to use their usual defence again this and cannot borrow from each other to cover any “temporary” shortfalls – liquidity needs.

We are now entering the second stage of the world financial crisis and there are real risks that Greece is going to trigger the interbank market to dry up. No way, if that happens, will there be any taxpayer bail outs of the banks this time. Game over for the existing world financial system.

Governments throughout the World will, as we speak, be looking up Modern Monetary theory and Full Reserve Banking. You and I, just in case, had better get some tinned food and bottled water in.

If the feared second stage doesn’t come to pass it is ridiculous that we didn’t learn the lessons in 2008 and we miss the chance to learn them in 2011. We need proper and real reform of the banking system. The risk of another collapse are real and we have been negligent allowing our politicians, who are funded by the bankers, to prevaricate and avoid enacting the reforms that will make us safe.

We need a transaction tax on financial activity.

We must have derivatives banned from being traded outside regulated exchanges.

Retail banks and Investment Casinos must be separated not just with Chinese firewalls but by separate ownership.

Bank contingent capital must be very significantly increased (to over 20%).

Bonuses must be taxed very heavily.

Full reserve banking and Functional Finance reforms need to be considered to allow proper democratically accountable control of the money supply.

123:

Money is an illusory but paradoxically very real construct intersecting with and highlighting a pre-existing natural power law. It can also be a means of slavery.

124:

S&L,

They hold deposits only covering a very small fraction of their potential liabilities.

yes, deposits are tiny, because they also rely on wholesale bank borrowing and start-up capital, but total assets and total liabilities match up (except in cases of outright Barings style fraud).

yes, because the banking system is also hooked up to a mint (central banks) spending power is magicked in that way, but that's because a mint literally creates money in a very real and physical sense (even if that physicality is electronic these days).

Banks have no inherent power that you don't have to create spending power, and a lot of the so-called money making models of banking could equally be applied to a shoe shine stall.

Again, if banks could *create* spending power, they wouldn't go bankrupt.

125:

As a follow up, can you have money without debt? What happens if you only have money? Presumably banking would become much simpler, if not non-existent, since it would become impossible to lend more than the money you took in.

Basically, a big secret is that banks create money by lending. This leads to a slow, generalised inflation, or in the case of the house price boom, a huge bubble. This created money gets spent back into the economy, boosting it beyond the ability to pay the debts back (unless of course you've invested in productive capabilities and there is the ability to purchase what you have produced in the general population).
Steve Keen is an Australian economist, one who has taken an interest in debt and its functioning. IIRC he also predicted a bust during the boom, and pointed at the large amounts of debt being accumulated as a major problem. It is a few years since I read a lot of his posts on his blog, but he had a nice little simulation showing how in order for your simulation to mirror reality you needed to put in debt and the creation of money by banks by lending. Once you put that it, it made things a lot clearer.

126:

Red no assets and liabilities only match up
In terms of reserve credits in central banks and only then because liquidity is poured in by central banks.

In tgecreal world a banks assets (the money it lends to custmers) are many many multiples if it's liabilities (the deposits made into it by savers).

This is fundamental to all banks busineses models which are all based on fractional reserve banking. Ie that only a tiny proportion of the money they have lent is covered by assets they own. Should anything other than a tiny proportion of customers withdraw deposits at the same time banks become insolvent.

This is why they all rely on wholsale funding. When a bank suffers larger than expected withdrawal of funds it borrows the
Money needed to cover this change from wholsale markets (eg other banks who want to earn interest on the surplus they have.

No banks anywhere in the western world operate full reserve business models where all liabilities ate covered by assets.

127:

Guthrie - you can have money without debt but not in our current economic model where only banks are allowed to widen the money supply by lending money that is not backed with assets. For a money system without debt you would need either a fiscally expansionist government or unsterilised quantitative easing (eg central banks crediting governments or reserves in banks or giving money to the population directly with no intention of receiving later payments to cancel the money given).

This is the basis of Modern Monetary Theory that Keen is explaining.

See for example

http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

128:

Then, what happens when debts are owed with interest? How do you pay off the interest if you haven't had an increase in money coming in or productive capabilities or suchlike? That seems to be the problem some of us have just now, so much lending and debt with interest but not enough extra money in the system to pay off the debt.

129:

Red the assets and liabilies in central bank reserve accounts of banks are balanced. This is because wholesale funding allows the same money to cover several debts. When any *significant* withdrawal occurs out of the banking system as a whole as in 2008 the wholsale market fails and central banks are forced to add liquidity (bailouts).

In terms of each individual bank they are all and always insolvent with deposits only covering a tiny fraction if the money they have lent out.

In normal times central banks play no part in money creation or widening the money supply. It is all done all the time by banks through creating credit. They allow people to. Or row money that previously did not exist. The hope is on aggregate the money lent finds productive use and returns enough increased value to cover the initial loan and it's interest.

Obviously this goes wrong frequently. Sometimes it bankrupts single banks caonetimes the whole banking system in a nation (Japan), region (asia in the 90s) or world (1930s or 2008).

Always it creates recessions and inequality.

130:

Guthrie. Yes this happens often. The IMF counts over 100 banking crises of the 2008 type since ww2. They are usually not worldwide or affect only brown or yellow people do we don't get big coverage of them.

Always the IMF (as a giant parasite steps in and robs the population of these countries to bail out the bankers. Read Naomi Kleins Shock and Awe). The same is happening now our governments are robbing their populations to pay for the bailouts and output gaps caused by the bankers.

131:

S&L,

When any *significant* withdrawal occurs out of the banking system as a whole as in 2008 the wholsale market fails and central banks are forced to add liquidity (bailouts).

Yes, as with any other business. Since this is Charlie's blog, lets take a book store. It buys books on credit and sells to a library on account. It will have very little cash in hand, in the till (for change and the like) and should the evil librarian be slow in paying, when, say, a tax bill turns up, or Mr. Stross looking for royalties, the book shop will fold. On paper its assets and liabilities will balance, but it will fail due to a liquidity crisis.

132:

"The core bit here is that money facilities exchange. I don't need to barter my pigs for a pair of shoes rather I can treat everything as separate transactions."

One very important theme in Graeber's book is that this Econ 101 picture is simply not correct.

133:

"Money has the ability to extinguish a tax obligation."

That's a sweet way of putting it.

134:

"Going beyond that, we also have a fractional reserve currency, where banks can create more money by piling more debt upon that government-issue currency, which further requires us to have confidence in the continuing ability of banks to pay us bank. You can see the cause of the current financial problem..."

Somebody described the banker/liquidationist/right-wing economist view during the Great Depression as "crying 'fire!' during Noah's Flood".

It's amazing how the same view pops up again, like a zombie.

135:

I'll take the collateral collapse, but there was no run on deposits here, though the banks used the possibility of same - and lied through their teeth, not were misinformed, lied about the size of the problem ("It's a liquidity issue" is the quote) - to spook the Finance Minister of the day into guaranteeing *all* deposits and borrowing in Irish banks. Which made bank losses state losses. Most of our current woes stem from that night - I mean, it would have been bad either way, but Ireland would not have the ridiculous debt it does if it hadn't fecked large chunks of it into the banks' cellars to hold up their floors.

/rant. ",)

136:

"A governments that fails at these things is given the boot in short order."

Where 'short order' means how long?

137:

Hello?

You didn't answer the question. Which is not about the current state of the British economy, but somewhat larger and more abstract ...

138:

Red - I think thereis a genuine difference. If the bookshop folds the librarian keeps the money. No money created or destroyed in the economy.

Banks actually widen the money supply (it trebbled in size between 1997 and 2006). They do this by lending money that doesn't exist anywhere.

Similarly since 2008 the banks have stopped lending so the money supply across the whole economy is contracting. This leads to depressionaru consequences and massive government debts.

Bankruptcies in non banking sectors can't do this.

139:

Charlie - all western economies rely on the same mechanism. Since the end of fixed exchange rates with the death of Bretton Woods all economies work on the same definition of money.

Fundamentally it is debt released by banks in response to inflation. This is very badly explained and very few people can get their heads around the impact this has on the whole economy because the media, politicians and educational establishments mode plain money as a fixed quantity system of exchange.

Of course it is nothing of the sort. To fully understand it involves Modern Monetary Theory and investigation of the interactions between the money supply and inflation. To start with neither banks or government are resource constrained. They are able to spend, create or destroy nearly unlimited amounts of money. They only sop on this is the effect on inflation or ideology of politicians.

140:

"This is the moment reserve credits are released and there is an increase in bank liquidity. We have done £275 billion of QE (equivalent to about 20% of UK GDP) since 2009 and M4 has contracted and we are at risk of deflation rather than inflation. Quite simply no matter what we say to them banks don't want to lend enough to get the economy growing."

Well then, why not print a trillion?

"So it is perfectly safe to retire government debt when banks aren't creating enough credit in the economy."

Unless the banks suddenly do start lending again, and then it's a bit too late to take the paper back?

141:

Dirk - that will happen. It's inevitable. TheAPF will end up owning all outstanding government debt. It's up to £350 billion (35% of all outstanding debt and rising) and the effects if qe are attenuated as it continues. Deleveraging continues and the money supply continues to contract. Qe is more needed now than it was last year in order to a) bail out the banks b) keep the money supply from collapsing. c) allow the government to continue deficit spending.

It could also be used to cancel outstanding government debt and I suspect this will happen quietly but not through overt choice.

The QE won't be inflationary in the future.  There is zero/nil/none/no earthly possibility of the Bank attempting to unwind the QE until at least 2017. 

Even if things don't deteriorate (they will) the government will still need to issue its own gilts until then according to the optimistic OBR forecasts.

It is impossible that the gilts bought up by QE in the APF will be saleable whilst the government is issuing its own debt. yields would go through the roof even if the auctions could be covered.

This is over 8 years after the initial reserve crediting for much of the QE. Many of the gilts in the APF will have matured and be canceled automatically by then.

Banks not the Bank of England determine the rate of growth in the money supply. The money supply is demand rather than supply constrained.  

If the economy has improved in 5 years time (that's still a big if) the banks will widen the supply as much as they want or are allowed to (by contingent coastal requirements). The degree to which banks widen the money supply in 5 years time will have nothing whatsoever to do with a few hundred billion pounds of reserve crediting five years in the past.

QE will not be reversed and this will have no effect on inflation in the future. If there was going to be inflation it would happen now when the reserves are credited. Ie the banks would immediately lend the reserve credits out into the real economy now. They are not doing this.

Also to note even if 5 years time policy interest rates are still at 0.5%. If we want to constrain the growth of the money supply then and choke off a recovery we can still do that by raising policy rates.

In 2019 Basel 3 kicks in too. The tightening of liquidity requirements will also act to put a break on banks lending. As will the separation of Trevino and casino due to Vickers. Both halves will need to hold there own reserves.

What is mostly happening is that governments, the media and other actors are very very badly misleading people about how the money supply works. It should be obvious to absolutely everybody by now that the government is not resource constrained and it can spend as much as it likes but that inflation will constrain spending but that after a Financial crash such as 2008 when we are in a liquidity trap that there is no risk whatsoever of inflation.

Somebody needs to fix this system very very badly but nobody cares about us the citizens. 

142:

"I notice most of you are trying to describe money as we use it in the culture to which we belong today."

I prefer to speculate about where it's going :-)

------------------------------------------

The metal wards against weakness. This is known, at least to the strong tribes, the strong men. To accumulate the tokens is strength, to take from others victory.

Other men may do your bidding for the tokens, the coyns, but in doing so they betray their own weakness, and inability to take.

Once the tokens could buy goods, but the strong tribes no longer feel the need to make things. The strong men can take what they want from the tributes paid to them by the weak, food, clothes, sometimes even blankets.

The strong men grow fewer as seasons pass. So many of their daughters leave for the weak places and never return. So too now do many of their sons (although they are not worthy of that title).

This is of no matter, the fewer true men remain, the more tokens they have, and the stronger they become.

They will become stronger, they will respect the teachings of their elders, and the ways of the Fox (although the Fox no longer speaks to them as it once did).

One day soon they will be strong enough to purge the spreading taint, to cast it out from both Earth and Heaven. Until that day they look up at the metal trees stretching to the sky, the lights flickering between the stars. They look up at the Weakness.

And they Hate.

143:

Why issue gilts when you can print money?

144:

True, money can extinguish private debts; but you and I can extinguish a private debt using some other medium we both agree to use. That said, it makes sense for governments to compel acceptance of their scrip to extinguish private debts, because it helps the creditor amass more to extinguish his tax obligations and forces the debtor to do even more work in the fields to acquire scrip in the first place.

145:

BTW, we need somebody that understands economics at ZS - care to sign up (full membership is free until the end of the month)?

146:

I enjoyed that!

Did you write it earlier or just now? It works really well just the way it is, but I wouldn't mind seeing a bit more either. :-)

147:

Charlie - all western economies rely on the same mechanism. Since the end of fixed exchange rates with the death of Bretton Woods all economies work on the same definition of money.

I'm not talking about post-1972 western economies; I'm talking about money in the broadest historical context.

(Question triggered by "Debt: The First Five Thousand Years" by David Graeber, which should give you an idea of the time scale I'm contemplating.)

148:

There's one form of money which can't be spent by living persons (or, I would think, by zombies or vampires): Hell money. See:
http://en.wikipedia.org/wiki/Hell_bank_note

There are now also Hell credit cards.

So far as I know, there isn't yet an equivalent of Paypal.

149:

I think there is, as you might expect, a certain set of orientations common amongst the commeters here, which lead to threads going off in certain directions.
The most relavant two being interest in politics and how such things work, and problem solving, whether politics or how to get a railway around the world.

There is perhaps a shortage of historians, economic historians (although I have a friend who is kind of one although its years since he left uni) and conservative minded people.

150:

It's an expression of time.

151:

Just wrote it now. I'd be tempted to expand it out and put it on my website, but I've been trying to avoid swamping it with my own crappy writing.

Also, it's a bit mean spirited and inflammatory. Especially given that a good chunk of my sites search traffic right now seem to be driven by one illustration, which happens to compares different ammunition types (turns out, bullets make for great linkbait) :-)

Possible demographic mismatch, is what I'm saying.

152:

Or a fantastic opportunity for self-amusement as you watch people not get the joke. ",)

153:

*blink*

Money is your anticipated result after telling us an entertaining lie.

Discuss.

154:

I think you have identified the anti-Wunch. This should be amusing.

*phones jobber*
*helicopters circle to deliver metric arseload of popcorn*

155:

money is crystallized sweat

156:

I'm going to guess the answer being fished for is "a mechanism to put people in partial peonage by putting a concrete value on how much of a peon they need to be."
On the other hand, how exactly would you get a modern economy moving without it or some close equivalent? Because there's only so much warm fuzzy joy you can have, but you can have an arbitrarily large amount of money...if working for the first, you might just stop when you're happy.

157:

Money is what enables travel.

158:

Well search is not much of my actual traffic.

It was just good for a Huh?, when I checked which search terms people were using to get there.

Turns out there are a lot of people googling about bullets and there is obviously a woeful lack of support for their needs.

But I'm not really a big fan of the "my political opponents are mindless savages" school of rhetoric. I just thought the concept was interesting.

159:

Well, credit and debt aren't entirely eqivalencies.

If you receive credit you may also be in debt, of course.

But it is banks that seem for now and the future to be the only entities to issue credit. Credit crunches are as much a threat to economies as debt, and perhaps more.

Though there some historical aspects of this, confined only to this nation's history (U.S.), that I do know something about, I'm not an informed commentator on these matters. CS is interested in the future, and my expertise, such as it is, is the past!

Love, C.

160:

Charlie - I see. Sorry for being rude on your blog. 

In terms of history I think the same type of evolutions happened to money. I know the uk story the best but similar parts happened everywhere else. this is what I think happened. ..

Prior to the 13th century money was fixed value barter. In the 13 th century money lenders began shaving off bits if good and silver coins to retain some of the value. Then the next swizz was to allow people to deposit coins for safe keeping. In return they received promissory notes (i promise to pay the bearer on demand). The money lenders learned they could run off and invest elsewhere a because customers rarely withdrew all their money at the same time. This was the beggining of fractional reserve banking. 

At this time the crown didnt have fiat power over the currency and so of course the predictable happened- Bank runs. Customers worked out that the goldsmiths were not covering their deposits fully and that if the goldsmiths had enough bad investments that the customers could lose everything. It hot so bad that in 1844 the British government banned all promissory notes except those issued by the Bank of England or those authorised by the Bank. Things stayed pretty stable until The 1900s when banks worked out that the laws (such as the 1844 Bank Charter Act in the uk) didnt prevent the creation of unpacked 'electronic' credits (only outlawing creation of unbacked notes and coins which were the reserves of Central Banks. So of course it's back to bank runs as banks did fractional reserve banking again. Since then we've never outlawed it so that's what we've got. 

In my mind the deeper question of money is what it means in terms of human experience. 

In economics theory (even going back to when money was merely a commodity or universal key for barter) money was always the means of expressing demand. 

Money in this case is a very poor informational signal to convey the complexity of human needs. 
Its like being stuck as a baby only being able to cry for MORE. 

As a consumer (or serf or whatever) you can't communicate you want somebody to stop doing things or do them differently. You can only withdraw demand and spending. 

This is why there are problems. Externalities are when maximising value for one economic  actor has costs for others. Think pollution, inequality or global warming, passive smoking, road accidents etc. money (without governments) cant address these issues as you can only scream I want with a binary choice to spend or not spend. Government taxation and regulation with fines) is a compromise to try and address this. 

But might there be a better system? What about where you could use money to communicate your real views like an adult rather than a child. What would happen if "money" was earned by pro social (as democratically defined) acts. Invent a cure for cancer-  get lots more votes (with votes being money). Pick up litter - get a little bit of money/votes. do something criminal - lose votes. 

Don't think it will ever happen as those with power get the money. They don't really want democracy to be real but it's a nice idea. 

161:

>>>But might there be a better system? What about where you could use money to communicate your real views like an adult rather than a child. What would happen if "money" was earned by pro social (as democratically defined) acts. Invent a cure for cancer- get lots more votes (with votes being money). Pick up litter - get a little bit of money/votes. do something criminal - lose votes.

What you describing IS democratic process. Everyone got their "vote money" and they use it to express demands. We already have this system. You could expand it with referendums and such.

162:

I am describing a process where the behaviours that earn votes are defined democratically. As you earn votes you have a better chance of influencing the laws on what behaviours earn votes.

The idea is that this way those who act in ways the majority want will choose systems that reward behavious maximise harmony and progress.

Eventually the system will settle on incentivising progress and harmony. If you don't like it you can still make arguments for change.

163:

>>>I am describing a process where the behaviours that earn votes are defined democratically.

That's how democracy works. Behavior of politicians earns them votes. And the more votes people give them, the more influence the politicians have.

>>>The idea is that this way those who act in ways the majority want will choose systems that reward behavious maximise harmony and progress.

Nope. "Those who act in ways the majority want" will do WHAT THE MAJORITY WANT. That's why populism is so popular.

>>>Eventually the system will settle on incentivising progress and harmony.

And everyone will get a pony.

164:

Heh- earn lots of votes. Get together with others who have lots of votes to change what behaviors get you votes to whatever you feel like doing, and to give you and your cronies a lock on power, including making votes hereditary. Repeat for a few generations. Enjoy.

165:

I see there's like 160 comments and no one has mentioned Galbraith, so here's this: Money: Whence It Came, Where It Went.

166:

C - sure but normal folks will fight tooth and nail to retain their happiness and power in a transparent system. Remover to get and increase voting power you'll have to carry the consent if the majority of votes out there.

167:

What money is (the idea of what it does/ is for) changes all the time, as society changes. If we agree that the idea of money should be different it would be and it is from even a couple of years ago.
Don't shout Greg, this is vague idea stuff as an illustration of how money has different signifiers.
I'm picturing the Wool Tax as a Tax in kind in late Medieval England. Where the money raised on sale of said wool the open market was used to pay off the country's war debt. And the 'beginning' of international trade where cash flow problems and promissory notes start making there appearance.
Or the concept of Mercantilism where moving stuff around makes profit.
Or in the presence of Wampum and Potlatch as a wealth display in societies that having a minimum amount of stuff is crucial for survival but not a maximum.
Looking at different parts of the money Net (not cycle) gives it different meanings. In my examples there's no labour just stuff magically shuffling about and the need for more other stuff.
But I'm dragging the thread into the past again

168:

money is an energy. it flows between things, but is not actually anything. best when converted into stuff.

169:

Reading history, money seems like a macguffin. Of course, I read history like I would any other story since it's all conveniently packaged in a narrative. Money is the macguffin that makes the story move along, causes characters to do things that they wouldn't logically want to do.

Money by itself is valueless. It's a relatively socially neutral (vs drugs or sex) way to get people to act out of character. Promise money to get people to do icky things like work. Threaten to take away money to keep people from doing socially unacceptable things. It seems like a particularly clunky system that's prone to abuse.

170:

money is change, it might be hard to find something that wasn’t.

171:

money came from a hunger for power that did not yet exist, so creating money also made the power, and as it was fed it grew, becoming larger and hungrier, it began to occupy previously empty space, as it needed a place to exist. it could replace a fist with a much larger one. talk being cheap, but useful for stalling, while fist learned to explode.

172:

music and dance came together.

173:

Please don't use this space for your abstract poetry.

174:

Serialised abstracted fungible promises.

175:

Trading in promises - what could possibly go wrong?

176:

Historically, I believe that money came from the same place as writing. IIRC in Ur or Chaldee or Sumeria people used to make an agreement to trade, and create little clay sculptures of donkeys, or whatever the agreement was, then this representation of the agreement to trade was wrapped into a clay ball to keep either party from altering it. At a later stage the clay ball was marked with its contents, so you wouldn't need to break it open to see what was inside. Then the insides were discarded, and the clay with markings (now a tablet) was used alone as a record of the agreement. This evolved into both writing and bank accounts.

If you want to go further back, Chimpanzees and Baboons from mutual assistance agreements. For that matter so do predatory fish and cleaner fish. This is an agreement to trade services, without the external symbolic accounting. (And cheating happens.)

With this line of thought, money is an external symbolic layer of accounting that attempts to prevent cheating. Governments, however, always cheat in their curencies. It doesn't matter whether it's the Roman Senate issuing fake gold coins, or fiat currency that has it's value inflated away. This is basically because there is no recourse against cheating when it's done by the government.

177:

Money is a socially constructed medium for normalising exchange-based transactions.

Let me unpack that a bit. First up, it's socially constructed - that means money, in order to be useful, relies heavily on everyone (or at least the vast majority) in a society agreeing to use it. It means it relies on everyone agreeing to use it for the same purpose (so, for example, banknotes are used as a means of exchange, rather than as a particularly awkward form of wallpaper). It relies on cooperation between humans as a means of obtaining value.

It's a medium - most currencies don't have any inherent value of their own; rather they have applied value from their use as currency (for example, an Australian $100 note is, when looked at objectively, simply a rather ornate piece of plastic. Gold, if one considers it dispassionately, is merely a rather useless soft metal which doesn't play well chemically with others). As with most media, it exists in order to make something easier - it's a tool, a machine for facilitating a particular human interaction, rather than an entity in its own right.

It normalises exchange-based transactional interactions. This means it makes them easier, makes them a regular part of interaction. The existence of money means we think of just about every type of interaction between persons in most monetary cultures in terms of exchanges of currency. Think of any kind of human interaction, and I'll guarantee you there's somewhere you can buy it in exchange for a sufficiently large wodge of currency. You can pay someone to give you sex, pay someone to bear a child, pay someone to raise your children, pay someone to feed you, clean you, touch you, and in the end, you can pay someone to kill you, and someone else to save your life - there is no interaction between two or more humans which cannot be facilitated (or at worst, simulated) for a sufficiently large sum of money.

On the other hand, it means if you have something I want, I'm able to negotiate with you to obtain it in exchange for something else. This doesn't seem all that important until we stop and consider what the options turn out to be if exchanging something for something else isn't an option.

If the thing I want is something material, there are essentially two options open to me: I can make one myself, or I can take yours from you. (There's also the third option, which is resigning myself to not having one). In order to make whatever-it-is myself, I'll need the materials and skills to create it. It'll take time and effort, and I may not be able to do it as well as you did. If I choose to take whatever-it-is from you, then I have to be either sneaky enough that you don't suspect I was the one who took it, or strong enough that you won't attempt to take it right back.

If whatever-it-is isn't a material thing (for example, if the thing of yours I want is your ability to tell good stories around the campfire) then these options remain the same, but the whole process becomes much more complicated. For example, I may not ever be able to replicate an ability or skill someone else possesses. If I kidnap the person who possesses that ability or skill, they could escape, or refuse to perform. If I kill them, well, it's pretty much cutting off my nose to spite my face.

Exchange transactions work because exchanges promote efficiency, and because exchanges are ultimately enriching. If, for example, you produce good spears, but you're a lousy hunter; while I'm a good hunter, but can't make a good spear no matter how hard I try, an exchange between the two of us (I'll hunt for you, if you make me spears to hunt with) can be ultimately beneficial to both. Your good spears improve my ability to hunt efficiently, while if I do the hunting for you, you have more time to devote to making very good spears.

Money has shaped and warped the way we think to a tremendous effect. It's possibly the most significant invention in the history of humanity. Meanwhile, at this present the second-most significant such invention (information technology [1]) is changing the way that we do things in so many ways that we may yet reach a point where this most significant invention isn't required any more... at which point the human species may well wind up entering a whole new psychological paradigm. And won't that be interesting to watch!

[1] I'm using a very broad definition of "information technology" here, covering everything from clay tablets right the way up to multiplexing databases and near AI scripting. Effectively, any technology which has to do with recording and manipulating information fits into this category.

178:

Sweetness and Light:

From my understanding of the banking system, I don't think this is correct. I think that only the central banks can increase/contract the money supply, which is one of the levers of monetary policy.

What Red Deathy was saying sounds more accurate to me. Banks are constrained by their balance sheets when making loans. The loans that they give people go in the assets column, the deposits that they have and the funds that they have borrowed go in the liabilities column. If assets + equity < liabilities, then they are insolvent. In other words, if they can't get any extra funds, either by 1. additional deposits, 2. Borrowing them, 3. Injections from the central bank (thus expanding the money supply), then they cannot do any additional lending. In other words, they cannot expand the money supply, the central banks do this. One mechanism they use is open market operations (http://en.wikipedia.org/wiki/Open_market_operation).

Where people seem to get led astray is with fractional reserve banking. AFAIK, this is mainly just an implication of the different maturity profiles of assets vs liabilities for banks. Usually the assets are long maturity loans (like mortgages), whereas the liabilities are short maturity like cash (deposits), or money market or repo financing. The net effect of this is that if all the short term depositors demand their cash, or the money markets freeze up and loans can't be rolled over, the bank can very quickly end up with liquidity/solvency problems.

The alternative to fractional reserve banking though would be having to match the maturity profiles on the assets and the liabilities, which would mean no long term mortgages or business loans without investors willing to tie up their cash for long periods.)

179:

Ahh, after a bit of reading, I realise that we we might both be right there.

In my post above, I am referring to the base money supply, whereas you are obviously referring to the wider money supply (i.e M2/M3), which does expand/contract due to the amount of lending activity in the banking sector and/or the amount of reserves the banks must have on hand to cover their lending activity.

180:

As the disclaimer goes...a product (the what) of imagination (the where). Money has uses, one being insurance, something created or made in the present to be used in the future, a tool that can facilitate safety and security, and sometimes illusions of it.

181:

In order to explain what money is, here is a drawing. Multiple drawings in fact.

http://superherogirladventures.blogspot.com/2011/12/superhero-girl-92.html

182:

It seems quite plausible to me that the rules on fractional reserve banking could reflect the "life" of the particular bit of money. But setting that up would be a whole new can of worms.

As it is, the "hot", intensely speculative, trading may well be warping the whole system. There's a place for it--people have to be there to buy and sell assets for them to have any value--but how do you make the asset worth less to a bank?

Maybe the much-screamed-about transaction tax would have the desired effect? Sometimes you have to sort of sidle up on a problem.

183:

I'll attempt this - In the general case, when people buy "a gold ring" they do not buy $natural grammes of gold formed into a closed loop of wire. They also buy a certain amount of "fashionability", some of the goldsmith's time etc. The vendor will also add a profit element for their time in showing it to you, an overhead for their costs of doing business...

Fashionability has a varying monetary value, following an undefined chaos function. Acordingly, when you attempt to sell the ring, the value of its fashionability may well have varied from when you bought it.

The goldsmith's time element cost will remain fixed at what it was when the ring was made.


The vendor's cost and profit when they sold you the ring are of no interest to someone who is buying it from you, so they have a value of 0.
Retail jewelers typically work on markups ot at leat 100%, and sometimes as much as 400%.

Is that enough to convince you that I understand what's going on without trying to enumerate everything?

184:

Interesting discussion (as per.)

I'm someone recently attempting to acquaint myself with basic economics, the practicle upshot of the ideas there in, (just reading Thomas Sowle's book Basic economics at the moment.) I'll pick up Greeba's book too as recommended here.

Wanted to give props, as I believe the youth say, to Sweetness and Light for their informative explanations.

Cheers

185:

"But might there be a better system? What about where you could use money to communicate your real views like an adult rather than a child. What would happen if "money" was earned by pro social (as democratically defined) acts. Invent a cure for cancer- get lots more votes (with votes being money). Pick up litter - get a little bit of money/votes. do something criminal - lose votes.

Don't think it will ever happen as those with power get the money. They don't really want democracy to be real but it's a nice idea."

I've been pondering something like this, operating like a LETS scheme. Cudos credits members of a demarchie can award for positive behaviour, productive Works and viser verser. With these being used to obtain services and goods between members.

The details of how it might operate are a bit beyond me at the moment. I can foresee some obvious problems though. Peple attempting to game the system, sub groups operating to disenfranchise an individual for what ever reason. Perhaps to counter this, Awarding negative or subtractive cudos credits may incur discouraging penalties Perhaps an algorithm to detect coordinated errent behaviour. I think the cudos currency would have to be based on a number of weighted metrics. And of course, there still needs to be real world money involved somewhere along the line implying exchange rates, to buy in materials the members use.

186:

"We need a transaction tax on financial activity." - Agree! --Even a 0.01% transaction tax would quickly wipe out a lot of sovereign debt. And, it's quite amazing that while almost every service and product in many countries has a VAT, this one sector that can tank the entire global economy has been exempt.

As to Charlie's original question - where did money come from ...

Haven't read the book, so I considered where such a concept would naturally originate and the relative sophistication of the individuals involved. Not to say that early Man was stupid, but I'd say that early Man probably had the same level of sophistication as a modern day 1st-world child of 3 ... So going back to interactions with my child when she was 3 years old, I'd say that money was a promise for a well-defined agreed upon value: one My Little Pony of her choice for tidying up her room by suppertime. The agreement was signaled by a token I gave her to hold until this promise was fulfilled.

This scenario has many of the elements already mentioned upthread .. the difference is that I think that money (tokens) first started within a small connected group (family) as a promise/obligation that could only be fulfilled in the future but which allowed one of the transaction parties to fulfill some existing, urgent need immediately.

I look forward to finding out what the experts say on this ...

187:

Yes, you'll have to get the majority of the votes. Once. Then, years or decades later, you just need a majority of that majority as you limit down the franchise.

188:

"Wee need a transaction tax"
Like a hole in the head.

Do grow up, peoples!

If/When Hollande gets elected, a huge amount of (French) business will come to the UK


What's better:
A tiny amount of tax on a huge amount of business, or no tax-income at all?
You should be able to work that out.

Meanwhile, is OGH's question being answered?
I suspect not.

189:

Money is the Big Lie (Goebbels style).

Everyone just pretends to believe the Lie, because they want in on the action, and the Lie is too big to expose without getting your fellows angry at YOU, not the Original Liars.

190:

Money is debt.

The money in my wallet is a collection of debts I hold, that I can exchange for goods or services.

191:

I'm a little late to the party, but I'll join in.

Our monetary system is a form of social control. It's there to ensure everyone contributes. 'Money' is a way of measuring the value of a contribution.

192:

A lie about what?

193:

big

194:

...really big!

195:

I've read about 3/4 of Graeber's book and find it rather interesting - especially how Graeber seems to posit that what money is changes between the abstract on concrete depending on historical context.

As a fan of military history, I'm also currently reading a book on the theory of maneuver warfare - which takes great pains to contrast it with it's opposite attrition warfare. It points out the inherent value in using military fires to obtain movement (maneuver), versus using movement to gain better firing advantages (attrition). The first seeks to gain victory by psychological dislocation due to movement, the second by use of overpowering mass and destruction.

One is better than the other in terms of costs of victory, but the risks are higher - with all that implies for the social aspects of organized and legitimate violence.

I imagine the role of money is similar used by different social groups - some use it to get it, other's get it to use it - and the difficult economic periods are when the definitions are unclear or uncertain.

196:

By replacing direct forms of trade with a symbolic economy, money makes organized large-scale manipulation of debt (and indeed things like resale of bets for or against debt and other more complicated bits of nonsense) possible. It also makes manipulation of the value of these symbolic units of trade possible (which is great if you are in the position to make lots of money by devaluing other people's money or raising the value of your own).

197:

Money is whatever you want it 2 be. Loved the crossworld merchants saga.

198:

By which I mean, $ is an idea. Most of human civilization is a set of ideas on which we occasionally agree. So $ is a group fantasy, 1 of many. All the manipulation of $, likewise.

Of course, we base being able 2 eat on this group fantasy. ?!

199:

This is good stuff. You should consider posting it to a flash fiction site so more people can enjoy it. (This would avoid the concern you raised earlier about possibly confusing visitors to your own Web site.)

200:

#define FLIPPANCY SMALLNUM

Money is a virtual machine – similar to a lever or wedge, albeit messier than any Platonic ideal – which makes certain forms of trade possible at a cost. The notion of cost expressed in terms of money is the hook which invites us to believe that money is fundamentally real.

Money is an externally-controlled token of authentication (similar to a PKI certificate which is certified in turn by a chain of other agencies presumed more reliable than the individual holding her/his banknotes) against a claim of promised return of value. Of course, not all promises are fulfilled, nor are all certifying authorities equally interested in verifying credentials of those whom they certify.

"Money / it's a gas" – a gas which expands and contracts in response to its environment's temperature (ease and rapidity of circulation). We speak of inflation and deflation as if these were phenomena more real than say, the breath of Mammon or the sussurating wingbeats of soaring alien space bats.

Money is, or has become, a leash – our shekels are made into shackles, for as long as we operate in the belief of a scarcity economy.

201:

Where does money come from? The only people I've ever heard explain how the government creates money were Ph.D. economists or acid heads.
But I'll give it a shot.
First, the government borrows some money from itself. Then it has two things: it has the money it borrowed, and it has the debt for that money. Since the government is such a great credit risk, the debt is an asset which can be collateral for more loans.
So the government ends up charging you interest for its creation of money.

Or something like that.

202:

A radio program from "This American Life" gave a nice explanation: trust.

http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

203:

Governments do not widen the money supply (outside of minting coins or printing notes which form less than 5% of "money"). Governments could do this but they dont.

Private banks haven been given sole power to widen the money supply for at least 30 years.

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This page contains a single entry by Charlie Stross published on February 27, 2012 4:43 PM.

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